The Fred Report – Non-correlated Portfolio Update

Timing and Weighting Methodology: 

Based on studies from Graham Day, former Senior Strategist at PowerShares, they run a trailing one-year correlation study of seventeen basic asset classes that have ETFs attached to them, rank them, and then use the five least correlated in a portfolio.  The correlations are run every quarter with a year look-back, the list is set, and then the portfolio is “untouched by human hands.”

We publish two lists. The first is the low correlation portfolio, direct from Powershares® as mentioned above. The second is the FRED Report Non-correlated Portfolio.  We add a couple of technical screens (a combination of overbought/oversold and trend work) and also have the ability to make changes to the list during the quarter. To further differentiate the FRED Report Non-correlated Portfolio we use six ETFs/asset classes instead of five. Last, the deciding factor for Powershares is a low correlation number. They select the five ETFs with the lowest correlation  (e.g. no higher than .50). While we will generally stick to that strategy, if an asset class looks really attractive we may use it even if there is a higher correlation – especially for our sixth asset class.

Commentary and Changes:

• 07/17/15: We remove DSUM and add TIP to get us back in line with the Powershares® model. We have some concerns about China in general.
• 04/10/15: The Powershares® strategy has changed. They have switched DBA to CASH. In The FRED Report uncorrelated portfolio we have no changes. We like DBA and we have a cash position.
• 01/21/15: The Powershares® strategy has changed. They have switched CASH to UDN. In the FREDReport Non-correlated Portfolio we will accordingly switch our UUP position to UDN.
• 10/13/14: The Powershares® strategy has remained the same but weights have changed. Their five categories are below. Last quarter we added DBB instead of silver, and removed DBA, as we believed it could have a seasonal decline, which occurred. We will now add DBA back into the portfolio to take advantage of seasonal trends on the upside. Our hardest question is – what to remove, and after much thought we remove tips. Our rationale is as follows: tips benefit only from inflation, while DBA benefits from inflation PLUS seasonal factors. Inflation will also benefit gold and copper. The dollar, although overbought, should act as a hedge and benefits if rates rise.
• 10/10/13: We received the uncorrelated portfolio data from Powershares and make the following changes: The Powershares model eliminates BKLN and adds DBA, so we will also eliminate BKLN and add DBA to our non-correlated portfolio.
• 07/03/13: Powershares® removed DGL and added DSUM to their model. We make the following change to our model as of the end of the quarter. We swap MUB for DSUM.  Gold is a riskier play than MUB but we think it has more upside.

Powershares Low Correlation Strategy:

FRED Report Non-correlated Portfolio: